Iowa Tax Updates: Changes for 2022 and 2023

January 28, 2023 Training Session Tax Year 2022

Agenda Updates from United Way staff Updates on IA Tax Changes New for 2022 TY New for upcoming 2023 TY What didn t change with recent legislation Misc New Info Resource Support Low Income Exempt Overview of making IA Adjustments Part-Year Residents Review IA Return Scenarios Final Notes Next Steps 2

Updates for Iowa

New for IA TY 2022 Not Much Tax bracket and Std Deduction values QBI IA will use 75% of Federal calculation Taxslayer handles all of that (Maybe you ll do a spouse allocation for QBI) Up to $1000 income exclusion for Premium or Retention Bonus funded by IA DHS for Most peace officers Correctional Officer/Medical staff Teachers at accredited schools Childcare workers It is not clear how we would identify that bonus aside from asking the client Charitable Mileage up to 50 starting July 1 IA 529 account limit up to $3,522/beneficiary 4

New for IA TY 2023 A Lot These changes are from Iowa Department of Revenue sources based on SF2417 (passed in 2018) and HF2317 (passed in spring 2022) We have no idea: How the IDR bureaucracy will end up actually interpreting and implementing these in the Expanded Instructions What the new tax form(s) will look like How it will be handled in Taxslayer In other words, IA training a year from now will be really interesting 5

New for IA TY 2023 cont Why be interested in these changes now? It doesn t affect completing TY 2022 taxes Clients do ask us about what they might do different for the next tax year We are not tax advisors, but its awkward to say we don t know anything about what s coming The honest answer is, we can t know exactly how this all will affect a client s taxes in 2023 That being said, it s still worthwhile to go over the changes (even if we can t predict the effect) 6

New for IA TY 2023 cont Retirement Income Not Taxed Age 55 or older on Dec 31, 2023, or Disabled Applied individually to spouses IDR is still drafting what income qualifies Married-Filing-Separate-Combined Return gone 100% QBI Federal amount carried to IA return Student Loan Debt paid by an employer can be used to reduce taxable income If the student also deducts Student Loan Interest, the Student Loan Debt amount must be reduced by that interest amount 7

New for IA TY 2023 cont 8

New for IA TY 2023 cont Iowa Tax Starting Point and Std Deductions This implies that the Federal Std Deduction or any Federal itemizing is already done before IA is started No details given on what IA adjustments are included or how this will be implemented Will there even be an IA Sched A? We will be done with spouse allocations, but not with IA adjustments 9

New for IA TY 2023 cont Federal Tax Deductibility Gone (Not Quite Yet) TY 2022 (or earlier) Fed tax received as a refund or paid in 2023 will still be included when we process TY 2023 What we will NOT deduct for the 2023 TY is Federal withholding and estimated payments applied to the 2023 Fed taxes We ll have one more season after this one of truly needing to see previous years returns 10

New for IA TY 2023 cont Federal Tax Deductibility Gone 2023 Example Sahlberg Scenario 2022 TY Taxes 2023 TY Same Data 2024 TY Same Data Current TY withholding $2200 $2200 $2200 Current TY Estimated Taxes $1600 $1600 $1600 Prior Tax year additional Tax $ 500 $ 500 $ 500 Total for IA Fed Adjustment $4300 $ 500 $ 0 Using the Sahlberg scenario as an illustration Rules for 2022 TY mean all three categories are included for the IA adjustment on line 31 Using the same data points As we ve interpreted the changes for 2023, only the additional tax paid in 2023 for 2022 taxes would be used to adjust IA taxable income for TY 2023 The withholding and estimated taxes paid during 2023 would NOT be allowed No adjustments would happen starting with the 2024 TY 11

New for IA TY 2023 cont Health Insurance Premium Deduction Only for taxpayers 65 or older with a net income of <$100,000 Will this deduction matter if this group doesn t have any income? Still can t double-dip; can t use the same insurance premiums for itemizing on Sched A and also for direct income reduction It does create situations where you would choose Yes to leave Health Insurance Premiums on Sched A $100,000 cutoff includes these added back Retirement Income Std or Itemized Deduction (Assume Fed?) QBI Deduction Personal Exemption (still set to $0) 12

New for IA TY 2023 cont Iowa Required Withholding Up until now, you had two choices for retirement withdrawals No withholding at all (Fed or IA) Withholding of both Fed and IA (5% minimum) Fed withholding with no IA withholding was not an option Starting in 2023, it appears you will not be required to have any IA withholding, regardless of the Federal choice, if The income is qualified non-taxable retirement income The taxpayer qualifies for the non-taxable status If a client asks, tell them to talk to the financial institution handling their retirement funds to discuss and confirm 13

Still in effect for IA in TY 2023 Income still not taxed for IA Military pension (DFAS) Federal Securities (e.g., Savings Bonds) RailRoad pension Social Security Income still taxed for IA, but not Federal Selected Municipal/State Bond interest 14

Other Late Updates

Odds-n-Ends If we see clients from the Ingredion strike, any union strike pay they received is taxable and should be on a 1099-MISC, Box 3. Per Pub 4012 (D-58 and I-1): Do NOT enter using the 1099-MISC screen Enter under Other Income Select Strike Benefits and set as Earned Income Under Self-Employment Tax , use Adjustments Non-Farm Enter the 1099-MISC Box 3 amount as a negative value This removes any self-employment taxes Resolving what I wasn t sure of 2 weeks ago for IA IA Educator Expenses limit is still $500 Limit for K-12 Tuition/Textbook credit is still 25% of up to $2000/child Child Dependent Care tax credit for IA tops out at $45K net income (Had been $90K for TY 2021) 16

Resource Support

Resources Sheets and Docs Sent out Digital Asset Limits and amounts for common credits and deductions IA Adjustments vs. Fed Vehicle Registration deduction Gambling 2022 IA School District list - #s and tax surcharges 2021 IA Handbook Still to come Simplified Method for 1099-R Part-Year resident 2022 Addendum for the IA Handbook Pondering Low Income Exemption 18

Low Income Exemption

Low Income Exemption For 2022, this applies if your income is less than Under age 65 Either Spouse Age 65 or older Filing Single $9,000 $24,000 All other status Income includes totals combined for both spouses, if applicable Standard Net Income (Line 26) plus Any Pension Exclusion (Line 21) added back in, plus Social Security Benefits (Step 4) (not taxed, but included for this calculation) $13,500 $32,000 This is why it is sometimes confusing why one client gets the Low Income Exemption and another doesn t, and they have a similar net income If a client has this exemption for the current or previous TY, their Fed refund is entered as $0 regardless of what is on their previous Fed 1040 20

Iowa Adjustments

Basic IA Adjustments Required Entry for Fed Refund, and possibly Fed tax paid from prior TY You must ALWAYS enter something for the Federal Refund field If the client paid taxes the previous year, you still put $0 for the refund Removing the refundable credits (Fed 1040 Line 32) may change a cash refund into a payment for input on the current IA return For both Fed refund and payment, enter a positive value There is no value brought over from the Federal return Other common adjustments that are not manually re-allocated Additional Educator Expenses Stays with spouse who had the expenses If left blank, Taxslayer uses the Federal value Any input replaces ALL Federal values, it does not add to them If both spouses expenses are < $300, no need to do an IA input School Surtax paid the previous year (no default Federal value) Allocated by Taxslayer as part of itemized deductions K-12 Tuition/Textbook credit (no default Federal value) Should stay with the spouse who has that dependent assigned to them in Step 3 on the IA 1040 22

Basic IA Adjustments - cont Other common adjustments applied directly to IA income Reducing interest income from Federal instruments From 1099-INT Box 3 Savings Bonds, Treasury notes are the most common Assume Box 3 is not taxed for IA unless you know otherwise Adding interest income from Iowa-based bonds that are not taxed at the Federal level From 1099-INT Box 8 Usually municipal bonds, or bonds related to state schools This one is hard to know for sure, since most clients do not know the details behind what created the Box 8 entry Assume no adjustments for Box 8 unless you know otherwise The IA Exp Instructions Step 2 Line 5 has detailed lists of what falls into both categories Reducing pension income for IPERS or DFAS Military IPERS change is the difference between Federal Taxable (Box 2a) and IA taxable (Box 16) For DFAS Military, you reduce by the full amount in Box 2a 23

Re-Allocating For MFSCR vs MFJ Taxslayer allocates two items which cannot be changed Pension Exclusion Itemized deductions Generally, the more equal the spouse s IA net income, the more they gain from making appropriate allocation changes with MFSCR instead of MFJ Once you approach a split of 85% or higher, it s unlikely MFSCR will help Taxslayer will use default allocations to decide which filing status is best, but that is frequently not the optimum The only way to know for sure is to try the allocations with MFSCR and see how the refund or amount owed changes Remember, the $ value you see in the upper right of Taxslayer will NOT update until you exit a state return You need to synchronize allocations and the filing status If you make allocations and leave the filing status as MFJ, Taxslayer will ignore what you put in the spouse s fields If you do some allocations with MFSCR and then manually switch back to MFJ, Taxslayer will NOT remove any of your allocation entries You have to go in and back them out 24

Re-Allocating For MFSCR vs MFJ Details for reallocating values can be found In the distributed resource sheet with details on most of the fields In the IA Expanded Instructions (details on rules for splitting the values) General sources for re-allocation % s, and what Federal total it applies to Previous tax year s IA net income ratio Federal Refund received, or Federal tax paid from that TY If that return is not available, use a 50/50 allocation Current tax year IA net income ratio after all Health Insurance Premiums removed Health Insurance Premiums that are NOT specific to an IRS form Ratio between spouses of current tax year income that has NO Federal withholding Fed Current tax year estimated tax payments Spouse allocation has no impact on IA estimated payments Current tax year IA net income ratio Most other allocation changes 25

Part-Year Residents

Identify Iowa vs Non-Iowa Income W-2 s are straightforward Taxslayer will pull those in Interest/Dividends If it was a local bank or credit union branch, assign it to that state National financial institutions, split by time in each state Adjust the date if you know the account was not open a full year Capital Gain What state did they live in when a sale took place? IRA/Retirement accounts What state did they live in when they took the money out? Pensions or any other monthly payments (e.g., alimony) Divide by the time period in each state If the payments started during that tax year, adjust using that date Unemployment Which state s agency issued the 1099-G? Gambling Was the payer an IA source, or were they living in IA when they won? IA wants to tax it either way Other Income Where did they live when they received it? 27

Identify Iowa Reductions Deductible portion of Self Employment tax Allocate by the percentage of IA self employment income Health Insurance Premiums For Medicare, allocate based on the time in each state For out-of-pocket, it s the state they were living in when they paid Paid Alimony Divide by the time period in each state If the payments started during that tax year, adjust using that date IA Retirement/Pension Exclusion Use the exclusion $s the client qualifies for ($6K or $12K), up to the amount of retirement income assigned to IA Federal Refund/Additional Payment input If the client did NOT live in IA the previous year, these are $0 Taxslayer will adjust some credits on the IA 1040 (Child/Dependent Care, etc.) Make your adjustments using the IA return Taxslayer sections These are similar to but not identical to the standard IA adjustments Taxslayer seems to provide helpful notes on the adjustment screens 28

Input for the other State(s) Make sure the client is aware we have no training on other states We ll give it our best effort, but will keep it as basic as possible In the Taxslayer state section, choose to add another state and pick the appropriate one Remember to get that state set up in the main eFile section of Taxslayer Consult with your site coordinator and other volunteers if you get stuck Make sure that state gets printed for the client Remember Taxslayer only has one date field for auto-debit, which it applies to Federal and all states If a client has moved out of and into IA, use the latest date they arrived for the IA input. Moved out of IA on Feb 1, moved back Aug 31 IA date inputs 8/31 for arrival, and blank or 12/31 for date left IA 126 does not use the dates for recalculating the taxes You will use them for allocation, but IA 126 does not 29

Iowa Scenarios

Training Scenario Iowa 1 Gloria Langford

Gloria Langford Parent (Grandparent) as a dependent The parent does not have to live with the taxpayer Understand exactly where all the parent s support is coming from, and who is paying for what (Pub 4012 Section C, especially C-4/5) Other Dependent vs. Child Tax Credit clarification I had stated in an earlier session that these are mutually exclusive That is true for each dependent, but some dependent(s) can be Other Dependent , and different ones qualify for the Child Tax Credit IPERS retirement contributions IPERS is NOT a voluntary retirement program That means contributions do not qualify the taxpayer for any retirement contribution credit That is why it shows up in Box 14 on the W-2 The retirement credit is calculated on form 8880, so we want to use the option in Box 14 that retirement does NOT carry to Form 8880 Note that printed 1040 1099-R just has Other displayed Selecting Other (not listed) will achieve the same thing IPERS contributions still reduce the taxable income on the W-2 32

Gloria Langford Reducing/Excluding Early Withdrawal penalty on a 1099-R (Code 1 Box 7) The most common qualified reasons our clients will have for an exclusion are higher education and medical expenses They have to be unreimbursed expenses Medical expenses are the only one (I believe) that has a threshold You can only exclude expenses that exceed 7.5% of your AGI Does not require you to itemize Easiest way to get the number for this category Get the return input all done EXCEPT for the Form 5329 Generate the return s pdf and see if there is any deductible amount showing on Sched A Line 4 If Line 4 is 0, they don t get any exclusion If line 4 is >0, use that as the $ value for Form 5329 There are a few cases where you can get an exclusion without using Form 5329, but it is extremely unlikely we ll see those Federal Refund/Taxes Paid ALWAYS check the refundable credits to adjust these values The majority of our clients will have this adjustment needed 33

Gloria Langford Health Savings Account It s easy to forget that HSA withdrawals count as reimbursement for medical expenses for itemizing or insurance premiums You can use HSA for medical or LTC premiums Always use the HSA to reduce the medical costs first, so the insurance premiums can go to the first page of the IA return The client s list of medical expenses seldom has the HSA funds already subtracted K-12 Expenses for Tuition/Textbook Credit Aside from tuition and required books/supplies, there are a couple key things to look at for qualifying expenses Has to be a school organized or sponsored activity Has to be something they can t use for day-to-day wear or activity Home schooling expenses do not qualify $2000 is the max per dependent, not the max total qualifying expenses Educator Expenses Expenses are tied to each spouse 34

Training Scenario Iowa 2 Gunther and Mary Anne Sahlberg

Gunther and Mary Anne Sahlberg IPERS Pension This is the other side of the IPERS coin The IA taxable value in Box 16 is usually not the same as the Federal in Box 2a, and it s easy to miss Use the difference between the two values Taxslayer will pull Box 2a into the IA 1040, so you have to make the adjustment in the Subtractions from Income screen in the IA section Even though you are reducing income, you enter a positive value Note: for Military pensions (DFAS), use the same field only you reduce ALL the taxable income Mortgage Insurance There are mortgage insurance premiums in Box 5 of their 1098 That is no longer a deductible expense Vehicle Registration Pickup trucks are now moving into the window for the 60% rule with older vehicles A 2010 truck qualifies for a deduction, but is more than 11 yrs old 36

Gunther and Mary Anne Sahlberg Qualified Charitable Distribution (QCD) Requirements: There must be some documentation explicitly stating the contribution is a QCD Could be from the issuing financial institution or the receiving qualified charity (501(3)(C)) The taxpayer must be 70 or older The contribution must have gone from the issuing financial institution DIRECTLY to the charity When entering the 1099-R, reduce the taxable amount by the QCD amount This is a rare instance where your input does not match the form On the Taxslayer main retirement menu, there is a Non-Taxable Distribution option Just check the QCD checkbox (there is no field for the amount) Taxslayer will put a small QCD note at the bottom of the 1040 Regardless of what the client has written down, this is NOT included in itemized charity contributions for Sched A 37

Gunther and Mary Anne Sahlberg Estimated Taxes If the client pays estimated Fed taxes in January of the filing year (not TY), it still counts for Federal but NOT for IA Any input in the Jan 15th Federal entry will NOT carry to the IA return If the client truly made a Jan payment, it must go in that field You may want to make an electronic Taxslayer note for that payment, because it should be included for TY 2023 If the client comes back, those notes carry forward If the client makes a payment in December, for example, you have two choices: 1. Enter it in the Jan 15th field, and manually adjust the IA value This is what I requested for the scenario 2. Just add that December value to one of the other fields Taxslayer just adds the field inputs into a total. It does not have to match the actual timing of IRS payments made It s acceptable if the client just tells you the total estimated payments they made in TY 2022 Note: The IA estimated tax input has a Dec payment option 38

Gunther and Mary Anne Sahlberg MFSCR vs MFJ The net IA incomes balance changed drastically between 2021 and 2022 Filing MFSCR for 2021 was a benefit for them Mary Anne retires, and the net income balance shifts to Gunther Now, even with all the proper reallocations, Mary Anne s income goes negative Dependents and MFSCR As soon as one spouse s IA income goes negative, or one spouse doesn t have enough tax to make use of their credits, IA MFJ is always better Taxslayer defaults all dependents to the taxpayer, so they get all the dependent credits on Line 43 You can shift dependents to the spouse in the IA Basic Data section This moves credits from the taxpayer to the spouse on Line 43, and can affect the total refund or payment This is an easy change to make, and you can shift back and forth with no other changes needed You may have to move any K-12 Tuition/Textbook credit 39

Training Scenario Iowa 3 Tiana Baker

Tiana Baker Income Allocation Savings Bond She cashed a savings bond while in IA, so that Box 3 income is excluded on the 1099-INT input screen She cashed it in IA, and the CU is a branch in IA, so we ll assign that $30 income to IA W-2s Taxslayer automatically pulls those to the correct state 1099-G She won this in IA from an IA casino, so it is $1000 IA income 1099-C She had the debt forgiven while living in IA from an IA CU branch, so it is IA income Alimony Equal monthly payments, so $1500 goes to IA (10 months) and $300 (2 months) to IL 41

Tiana Baker Adjustments Health Insurance Premiums Assume the dental insurance was constant all year (In a perfect interview, that would be a question to ask) $1000 goes to IA (10 months) IL does not have that adjustment, so the other $200 is not used Federal Refund Assume she didn t file an IA tax return for 2021 (again, in a perfect interview that would be confirmed) Federal taxes had no effect on 2021 IA return, so ignore them for 2022 Enter $0 for the IA Federal Refund input (IA Exp Inst Step 7 Line 27) Other Notes Make sure W-2 and other non-IA docs have correct Taxslayer addresses Itemized expenses are not allocated We do not make adjustments on credits directly We did not enter allocations for Child Care expenses Taxslayer adjusted the Child/Dependent Care credit carried to IA based on the new income ratio The rule used to adjust the tax is relative to income %, not time 42

Interviews

Interviews (IP or NIP) Perfect Interview This does not exist. We all do the best we can Too many variables with clients, time, tax situations Be considerate of the client, but do not be afraid to ask questions If it affects their taxes, we have an obligation to ask VITA Intake Sheet This is not mandatory, but can be extremely helpful The end goals are to: Capture or calculate all the important information just once Filter out what we do not need Make it understandable to the next person looking at it You can use the intake sheet, the 13614-C, the photocopy of IDs/SSNs, or a blank piece of paper The NIP prep or any QR will still double check some things, but it will be much quicker and more efficient if the data is clear and summarized 44

Final Resources

Iowa Good school district locators: https://www.niche.com/k12/schools-near-you/ Search on niche district locator https://www.greatschools.org/school-district- boundaries-map/ Search on greatschools district locator School District Surtax list https://www.freetaxusa.com/FreeTaxUSA/formdownl oad?form=ia_school_dist.pdf Search on IA school district surtax list 2022 46

IRS Access Options for getting to the IRS: On-line (ID.me or already existing login) Phone: General: 800-829-1040 Trans: 800-908- 9946 Local Office Appt: 319-375-9166 Option to get a tax transcript mailed without a login https://sa.www4.irs.gov/irfof-tra/login ALL new account sign-ups for the IRS site are handled through the ID.me third-party company 47

Next Steps

Ready? Make sure you are signed up for site times Verify you have a valid logon for live Taxslayer Download any supporting resources you want 49

Questions? Thank you! See you at the sites!